The Value of Intangible Assets

The evolution of the digital economy changed the way we value companies

U.S. equity markets struggled between slight gains and losses throughout the day with no catalysts to propel sentiment in either direction. With no news on a new stimulus bill and negative headlines on vaccine developments, the DJIA, the S&P 500, and the Nasdaq all closed slightly lower.

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Some individual stocks, however, did see some major movements. Investors snapped up shares of Snap Inc. (SNAP) as the social media company reported better earnings yesterday. But they clicked off of shares of Netflix (NFLX), which just can't grow as fast as it used to. Oil stocks were pummeled on oversupply concerns and anything close to the Internet or Bitcoin saw a big bump.

Investors' perceptions about value have changed over the years, but 2020 has accelerated that dynamic as the pandemic has changed how we work, interact, invest, and spend our money.

Stock price chart

Intangible Value

The evolution of the digital economy has changed the way we fundamentally value companies. The industrial economy dominated the 20th century and the most valuable companies were those with tangible assets like oil wells, railroads, and industrial machinery. The Internet changed all that, of course, and while hard assets still have value, intangible assets like patents, marketable securities, intellectual property, and consumer data have become much more valuable in the past two decades.

Bloomberg reporter Sarah Ponczek put a fine point on it in her terrific column. As Sarah puts it:

“Take all the physical assets owned by all the companies in the S&P 500, all the cars and office buildings and factories and merchandise, then sell them all at cost in one giant sale, and they would generate a net sum that doesn’t even come out to 20% of the index’s $28 trillion value . . . Back in 1985, before Silicon Valley came to dominate the ranks of America’s biggest companies, tangible assets tended to be closer to half the market’s value.”

SNAP vs. TXN price chart

Case in Point

If you needed any more evidence of this, look at how investors have gone over the moon for SNAP, which reported a big increase in daily active users last quarter. SNAP makes a great app and has very few tangible assets. It also lost $200 million last quarter.

Semiconductor maker Texas Instruments, on the other hand, has a lot of tangible assets on its books. It reported third quarter earnings that exceeded analyst expectations, growing revenue 18% sequentially to $3.8 billion and earning $1.3 billion in net income.

But that's just not good enough in a world where intangible assets are so valuable.

Bitcoin vs. S&P 500 vs. Gold price chart

What's Up With Bitcoin?

Speaking of intangible assets, Bitcoin has been on a multi-day rally that has brought prices back above $12,000 for the cryptocurrency.

No one really knows what drives Bitcoin prices because it is not backed by assets we can value like gold. That's also why Bitcoin enthusiasts love it, by the way. 

Apart from its mysterious value, however, there are things happening around Bitcoin in the real world of payment processing and central bank proceedings that could be behind the recent enthusiasm.

  • PayPal said today it will allow customers to buy, hold, and sell virtual currencies directly from their online wallets. Initially the service will only feature Bitcoin, Ethereum, Bitcoin Cash, and Litecoin. It will be available to users in the U.S. in the coming weeks and expanded to Venmo and select international markets in the first half of 2021. Beginning early next year, customers will also be able to use their cryptocurrency to pay PayPal's 26 million merchants around the world.
  • Yesterday during a panel on cryptocurrencies and international payments sponsored by the International Monetary Fund, Fed Chair Jerome Powell said that the Federal Reserve is researching the viability of creating and maintaining its own central bank digital currency (CBDC).
  • Last week, payment processor Square, run by Bitcoin enthusiast and Twitter CEO Jack Dorsey, announced it would hold $50 million worth of Bitcoin in its treasury.

The coin is up more than 50% this year but is still around $7,000 away from its all-time high of about $20,000 set in Dec. 2017. While it is supposed to be a non-correlated asset with respect to the stock market, Bitcoin prices fell more than 30% in March while stocks were diving into a bear market. That said, it has better returns than stocks or gold in 2020, but you need the stomach for the volatility (chart above).

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